Brief Exercise 8-22 Structuring a Keep-or-Drop Product-Line Problem with Complementary Effects Refer to the information for Hickory Company. Relevant fixed costs associated with this line include 80% of parquet’s machine rent and all of parquet’s supervision salaries. In addition, assume that dropping the parquet product line would reduce sales of the strip line by 10% and sales of the plank line by 5%. All other information remains the same.

Presented below is a segmented income statement for Hickory Company’s three wooden flooring product lines:

Required:
1. If the parquet product line is dropped, what is the contribution margin for the strip line?
For the plank line?
2. Which alternative (keep or drop the parquet product line) is now more cost effective and by how much?

Strip Plank Parquet Total Sales revenue $400,000 $200,000 $300,000 $900,000 Less: Variable expenses 225,000 120,000 250,000 595,000 Contribution margin $175,000 $ 80,000 $ 50,000 $305,000 Less direct fixed expenses: Machine rent 5,000 20,000 50,000 75,000 Supervision 15,000 10,000 20,000 45,000 Depreciation 35,000 10,000 25,000 70,000 Segment margin $120,000 $ 40,000 $(45,000) $115,000